Question

Decisions for Tomorrow In 2019, 360,000 electric vehicles (EVS) were sold in the United States. Instructions: Round your responses to one decimal place. a. Suppose the average price of these cars was $40,000. Calculate price elasticity of demand if a $2,000 tax credit caused an increase in sales by 20,000 EVs

Answer 1

The price elasticity of demand is calculated using the formula: Price Elasticity of Demand = % Change in Quantity Demanded / % Change in Price. With a $2,000 tax credit causing an increase in sales by 20,000 EVs, the % change in quantity demanded is 5.56%. The % change in price is -5%. Therefore, the price elasticity of demand is -1.11.

Step-by-step explanation:

To calculate the price elasticity of demand, we need to use the formula:

Price Elasticity of Demand = % Change in Quantity Demanded / % Change in Price

First, we need to calculate the % change in quantity demanded:

% Change in Quantity Demanded = (New Quantity Demanded - Old Quantity Demanded) / Old Quantity Demanded * 100

Using the given information, the old quantity demanded is 360,000 and the new quantity demanded is 360,000 + 20,000 = 380,000. Plugging these values into the formula:

% Change in Quantity Demanded = (380,000 - 360,000) / 360,000 * 100 = 5.56%

Next, we can calculate the % change in price:

% Change in Price = (New Price - Old Price) / Old Price * 100

Using the given information, the old price is $40,000 and the new price is $40,000 - $2,000 = $38,000. Plugging these values into the formula:

% Change in Price = ($38,000 - $40,000) / $40,000 * 100 = -5%

Now, we can calculate the price elasticity of demand:

Price Elasticity of Demand = % Change in Quantity Demanded / % Change in Price

Price Elasticity of Demand = 5.56% / -5% = -1.11